Buying into Bahrain

Last month STC came through as the winner of Bahrain’s third mobile licence, having participated in the final rounds of the bid process without competitors. Given the proximity of Saudi Arabia to Bahrain, and the significant human traffic that commutes between the two countries, it made sense from a strategic perspective for STC to pursue the opportunity aggressively. However, does the absence of any other short-listed bidders in the final stages of the process perhaps point to the concession being a largely unnecessary and unattractive investment?

Jostling for position in Bahrain’s increasingly congested telecoms space will require a large amount of skill

At the end of last month Bahrain’s Telecommunications Regulatory Authority (TRA) confirmed STC the winner of the country’s third mobile licence, with the Saudi operator having bid BD86.687 million (US$230 million) for the concession. With a population of just 1.2 million inhabitants, this implied a per capita licence fee of around US$192 for Bahrain, compared to US$5.50 for the third licence in Iran, and US$36.25 for Egypt’s third mobile licence based on a population estimate of 80 million.

STC will no doubt benefit from roaming revenues generated by Saudis travelling to Bahrain, which is an overwhelmingly popular destination. Despite this likely boost to revenues, the operational landscape in Bahrain still appears to be a difficult one of a new entrant to navigate.

The award process itself never quite captured many operators’ imaginations from the onset. At the end of November 2008, and citing the challenging world financial situation, the TRA announced the delay of the deadline for bids for the licence till January 11.

The original deadline had been set as November 13, but following formal requests from the four registered bidders in the tender, the TRA extended the deadline until November 30. On November 24 this was extended again.

Incumbent operator Batelco is a force to be reckoned with, reporting net profit of BD104.2 million for 2008. This was an improvement of 2.7 per cent over 2007. Batelco counted 767,000 mobile users in its domestic market at the end of December, representing a market share of over 50 per cent. As of the end of September 2008, second mobile operator Zain reported a total of 603,000 active subscribers, with the two network operators combined charting a mobile penetration rate in excess of 140 per cent at the end of 2008.

Bahrain has also awarded two WiMAX licences, one of which was won by Zain as a defensive strategy, with the other being awarded to Mena Telecom.

Mena Telecom launched its 802.16e WiMAX network at the end of November last year, providing high speed wireless voice and data services across Bahrain.

“We are pleased that the telecom market continues to open up in the Bahrain,” commented Abdulhakeem Al Khayyat, CEO and managing director of Kuwait Finance House (Bahrain) and chairman of Mena Telecom, at the time of launch. “This is a very proud moment for Mena Telecom, as it has introduced a new chapter in the kingdom’s telecommunication history. Our customers will now enjoy connecting to the world easily, reliably and affordably using cuttingedge wireless technology.”

Early this year Mena Telecom reported that its retailers had been restocking WiMAX customer premises units at a fast rate, and had plans to expand its number of retail outlets in order to cope with demand. Thus given the level of direct and indirect competition faced by STC’s impending mobile service, the prospects do look challenging, and it is understood that these factors deterred other bidders from participating further in the licensing process. “Considering the amount that STC bid, we think we were fortunate not to participate in the final stages of the award process as the amount makes no sense to us,” an executive at a regional telecoms operator told Comm. It seems that we were right to stick to our case, indeed,” he added.

One advantage that STC will be likely to benefit from is the introduction of mobile number portability in Bahrain. Despite strong opposition from incumbent operators, which argued that there would be limited market benefit from the introduction of the regime, the TRA has pushed ahead with plans to introduce it to ‘level the playing field’.

An additional point of strategic significance is STC’s recent entry into Kuwait. In much the same way in which it was awarded Bahrain’s third mobile licence, the Saudi telco went about acquiring the third licence in Kuwait. Viva commenced commercial operations on December 3, with subscribers enjoying free local calls for their first three months. Competitive pricing plans were also in place.

STC owns 26 per cent of Viva, and calls made to STC numbers in Saudi Arabia are charged at a local rate. Subscribers of the prepaid ‘Value Service’ also have access to free on-network local calls for an unlimited period of time, and their choice of mobile phone number.

The Kuwaiti government holds 24 per cent of the Kuwait Telecom Company, with the remaining 50 per cent sold to citizens in an initial public offering held in August. The capital of the company is KWD50 million (US$182 million).

Competitors Zain Kuwait and Wataniya had a combined 2.5 million customers in a population of 3.4 million people, representing a mobile penetration rate of 73.5 per cent at the beginning of December. Thus STC is now in the position to create a regional network and entice subscribers travelling between Kuwait, Saudi and Bahrain to remain with the same network operator. The only downside to this strategy is that Zain already offers coverage throughout these three markets and is better established in two out of three of these countries, Kuwait and Bahrain.

STC is also feeling the effects of emerging more aggressively onto the international domain. The telco recently reported that Q408 profit fell 62 per cent, blaming it on foreign currency fluctuations. Profit during the quarter amounted to SR1.17 billion (U$311 million) in the three months to end-December, down from SR3.06 billion recorded for the same period a year earlier.

“The drop in the fourthquarter net profit … stemmed from currency differentials in the company’s investments abroad,” a STC statement read. It estimated the cost of currency fluctuations at SR2 billion. STC has made investments in Maxis Group of Malaysia, Oger Telecom, and Viva, the third mobile operator in Kuwait, expanding the Saudi telco’s coverage area to include Turkey, India, Malaysia, Indonesia, Kuwait, South Africa, and now Bahrain.